California records $97.5bn surplus, driven by the rich

Bloomberg

California Governor Gavin Newsom said that his state has a record $97.5 billion operating surplus, as high tax rates on its wealthiest residents mean he has more cash to fund liberal priorities such as education and health care.
The surplus is bigger than the entire 2020 spending of any other state except New York and Texas. Of that windfall, lawmakers can tap $49.2 billion for any purpose. That figure surpasses the staggering $38 billion that they had at their disposal during the previous budget season, then considered the biggest.
The surplus is “simply without precedent,” Newsom, a first-term Democrat up for re-election this year, said as he unveiled a $227.4 billion budget for the next fiscal year beginning in July.
While billionaires such as Elon Musk have derided California’s high taxes as they decamped to low-tax states such as Texas, the progressive tax system rakes in more revenue when income rises for its wealthiest residents. That group has reaped the benefits of rising stock prices and stable employment even as many lower-income workers lost their jobs in the pandemic. For capital gains realisations alone, California expects to collect a record $291 billion for 2021, budget documents show.
“It’s a sign of how well a number of people are doing in this economy,” Newsom said. “I’m proud of California’s progressive tax system and we’re the beneficiaries of that.”
This lopsided tax structure, in which the top 1% of earners pay nearly half of personal income-tax collections, also means revenue could plummet severely in an economic downturn. Indeed, capital gains as a share of the personal income collections are at levels last seen shortly before the dot-com bust.
Newsom said he is “deeply mindful” of prospects of a slowdown. More than 90% of the surplus would go to one-time spending items, he said. Reserves, including constitutionally mandated deposits, total $37.1 billion. Newsom also proposes paying off $3.5 billion of bonds early — an idea pitched by Wall Street — and using cash instead of selling debt to finance some capital projects.
Newsom’s spending plan also allocates billions of dollars to providing checks to residents to offset rising costs, subsidising health care and fortifying the state’s energy grid and responses to climate change.
Global inflation, war in Ukraine driving up costs, climate change impacts… everyone is feeling the weight.
In what Newsom called the biggest inflation package in the country, the state would send $400 refunds to personal car and truck owners, with a maximum of $800 for up to two cars. Legislators have proposed broader taxpayer relief based on income.
Asked about the potential of his surplus spending causing inflation to spike even more, Newsom said he didn’t think there would be a “significant impact.” The governor said offsetting costs for residents is “wise and noble, and it’s something I think that should be celebrated and not criticised.”
While Democrats have a supermajority in both legislative chambers, their priorities have at times diverged from Newsom’s. Lawmakers last month declined to act on the governor’s request to delay an annual inflation-indexed fuel tax increase set for June, saying they saw “pitfalls” in the temporary move.
Some of Newsom’s proposals are “encouraging,” said Senate President pro Tempore Toni Atkins and Senator Nancy Skinner, chair of the budget committee, in a joint statement. “Others, as happens every year, will require more discussion and negotiation.”